Oil giant Exxon Mobil Corporation
has wavered on the charts recently, drawn down by the recent plunge in oil prices overall. And in the first few hours of trading, option traders are reacting. So far, there have been more than 20,000 puts exchanged, more than twice the normal amount. Of interest has been the May 87.50 put, which has seen nearly 1,100 contracts change hands.
About 30% of the puts have been bought at the asking price, and volume exceeds open interest, indicating at least some of these were bought to open. With a volume-weighted average price (VWAP) of $1.87, the stock needs to close at or below $85.63 (strike minus VWAP) on the expiration date of May 17 to make a profit. Without that 3.6% drop from current levels, all the investors would lose is the premium paid.
These trades fit right in with the current sentiment toward XOM on the option trading floor. The Schaeffer's put/call open interest ratio (SOIR) stands at 1.24, which is higher than all but 20% of readings taken in the last year. In other words, put trading is much more popular than usual right now on options that expire in the next three months.
But oil overall is trading around $91 a barrel, pulling down potential profits for companies such as XOM. Shares of the oil giant are down 3.4% from a recent high of $91.93 on Jan. 29, but have stabilized somewhat in the last two weeks. Furthermore, XOM's 200-day moving average is ascending into the $88.10 region -- this trendline acted as support in late February, and could contain additional downside. But Credit Suisse just yesterday lowered its earnings outlook for XOM, and there are still six analysts with "buy" or better ratings on the stock, meaning more instability could lead to more downgrades or price-target cuts.
This article by James Pilcher was originally published on Schaeffer's Investment Research.
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No positions in stocks mentioned.